Train to Prevent FraudMost fraudulent activity can be caught by putting effective internal processes and procedures in place to minimize the chances for illegal behavior. But don't forget one of the best sources of fraud prevention: your employees.
In order to detect and prevent fraud, employees must first know what to look for, and then what to do about it. (Keep in mind this article will focus on preventing fraud, not on preventing theft.)
Employee fraud can take place in many ways, but by far the most common involves accounting, accounts payable, and payroll functions. In order to commit fraud, it helps to have access to money and accounts. Employees who submit expenses reports are also prime sources of fraud, especially if your internal controls are weak.
So let's start with the basics. Train your employees so they understand company policies and procedures. Make sure they know and follow all rules and guidelines. And make sure they understand the repercussions of committing a fraud – up to and including criminal prosecution.
After an internal company review, put the following processes in place and train employees to follow these processes. Internal training should include:
- Create separate duties with checks and balances built in. Require multiple approvals for expenditures. Have multiple employees keep the books, handle payroll, make deposits, and reconcile bank statements.
- Cross-train employees to perform basic financial functions. Relying on one person to handle a financial process makes it easier for that person to commit fraud.
- Train employees to perform basic internal audits – outside of their normal work area. Oversight is a great deterrent.
Teach employees to watch for:
- New account fraud – setting up accounts based on stolen identity or personal information
- Credit card fraud – using credit cards without authorization
- Check fraud – using checks without authorization, or using fake checks
- Phishing – fraudulent attempts to get personal or company information that can be used to perpetrate identity theft
- Identity theft – using another individual's personal or financial information without his or her consent
- Invoicing for products or services that were never provided
- Invoicing for over-utilization of services (i.e. billing for unneeded services; the services were performed but were not needed or requested)
Then establish set procedures for what employees should do if they suspect internal or external fraud. Your procedures for handling external fraud can be straightforward and should not require significant judgment on the part of the employee. For example, if a cashier suspects that a customer is attempting to use a stolen credit card, they should immediately notify a member of management before proceeding further.
With internal fraud, the actions taken may not be so clear-cut. Many employees will hesitate to accuse others of illegal or unethical behavior; create a climate of trust by establishing a confidential way for employees to share their concerns. Confidentiality protects the whistle-blower and the alleged perpetrator; if the accusations are unfounded, no one needs to know there were ever suspicions in the first place.
To prevent fraud, thoroughly train your employees, and then follow up to make sure that training is consistently put into practice.